An Outstanding Restaurant Franchiser for Growth

Do you want outstanding returns? Then you should have MTY Food Group Inc. (TSX:MTY) on your watch list.

| More on:

Growth stocks can greatly boost the returns of your portfolio. The average market returns have historically been 10% with inflation included.

You might not have heard of MTY Food Group Inc. (TSX:MTY) because it’s a relatively young company, having traded on the Toronto Stock Exchange for just a little over six years.

Between the end of August 2010 and 2016, MTY Food Group’s average annualized rate of return was 25%, which equated to total returns of just over 280%. In that period, dividends only contributed a little over 4% of its total returns.

The business

MTY Food Group is one of the largest franchisers in the Canadian restaurant industry. Last year the company exceeded $1 billion of sales for the first time. For 35 years, it has operated quick-service restaurants and grown via acquisitions and strategic alliances.

MTY Food Group made its first acquisition in 1999. Today, it has about 5,500 stores under multiple banners, including, but not limited to, Tiki Ming, Cultures, Sukiyaki, La Cremiere, Panini Pizza Pasta, Villa Madina, Croissant Plus, Thai Express, Kim Chi, Yogen Fruz, Koya Japan, Vie & Nam, Tandori, Tutti Frutti, Taco Time, and Valentine.

Consistent returns

MTY Food Group’s return on equity has been consistently in the double digits–between 16% and 27% in the last decade. In the last five years, it has been between 16% and 23%.

Its proven ability to generate returns from shareholder equity has led to strong dividend growth in the past five years, in which the company grew its dividend per share at a compound annual growth rate of 54.8%. However, that percentage is biased because it includes its first dividend hike, which was exceptionally high.

To put things in perspective, its three-year average dividend-growth rate was 22% and its dividend hike for this year was 15%. Its payout ratio is about 26%.

Recent developments

In July MTY Food Group announced that it has acquired all of the shares of Kahala Brands, which was its largest acquisition yet, totaling about US$310 million.

Kahala operates 18 brands in 27 countries with about 2,800 locations. The transaction will result in about 5,500 franchised and corporate locations and is expected to double MTY Food Group’s annual sales to $2 billion.

In the news release, CEO Stanley Ma stated, “This is a turning point in MTY’s history. MTY now has a solid, profitable and scalable platform from which to grow its U.S. and international operations. Moreover, a sizeable, dynamic and talented group of employees is now joining the MTY family. This transaction opens the door to endless opportunities for MTY and its shareholders.”

Swap current income for growth

You’ll notice that MTY Food Group offers a small dividend yield (of 1.1%) compared to the typical companies one would buy for dividends such as Bank of Nova Scotia and Rogers Communications Inc., which yield 3-5%.

However, due to MTY Food Group’s high-growth track record, it has been increasing its dividend at a double-digit rate that more mature dividend-growth stocks such as Bank of Nova Scotia and Rogers can’t provide.

Essentially, by investing in MTY Food Group, you’re trading current income for growth. That is, you expect most of your returns to come from price appreciation and your income stream to grow at a faster pace than average.

Conclusion

Despite being an excellent company to boost growth in a diversified portfolio, MTY Food Group has had a price run-up since the announcement of the Kahala acquisition.

As a result, at below $43 per share, MTY Food Group trades at a forward price-to-earnings ratio (P/E) of more than 24.2, which is a tad expensive.

Value-conscious investors should wait for a pullback to at least $37 for a maximum forward P/E of 21 or wait for some sideways price action (so earnings can catch up) before investing.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng owns shares of The Bank of Nova Scotia. The Motley Fool owns shares of MTY Food Group and ROGERS COMMUNICATIONS INC. CL B NV. MTY Food Group and Rogers Communications are recommendations of Stock Advisor Canada.

More on Dividend Stocks

Canadian dollars in a magnifying glass
Dividend Stocks

3 High-Yield Dividend Stocks That Are Screaming Buys Right Now

Are you looking for great income stocks? Here's a trio of high-yield dividend stocks that pay insane yields right now.

Read more »

Piggy bank with word TFSA for tax-free savings accounts.
Dividend Stocks

Transform a $5,000 TFSA Into a $50,000 Retirement Nest Egg

The TFSA is a powerful tool that can grow a small investment into a substantial retirement nest egg over time.

Read more »

A meter measures energy use.
Dividend Stocks

Is Fortis Stock a Buy, Sell, or Hold for 2025?

Fortis has increased its dividend annually for the past five decades.

Read more »

analyze data
Dividend Stocks

3 Dividend Stocks That Are Screaming Buys in November

Here are three top dividend stocks long-term investors won't want to ignore during this part of the market cycle.

Read more »

senior relaxes in hammock with e-book
Dividend Stocks

Generate $175/Month in Passive Income With a $30,000 Investment

Dividend aristocrats offer reliability, and many of them also offer generous yields. With sizable enough discounts, these yields can become…

Read more »

dividends can compound over time
Dividend Stocks

Best Dividend Stocks to Buy Now for Canadian Investors

These three stocks would be excellent additions to your portfolios, given their solid underlying businesses, consistent dividend growth, and healthy…

Read more »

data analyze research
Dividend Stocks

3 Undervalued Stocks to Watch in November

Not all undervalued and discounted stocks are destined or poised to make a comeback soon, and a protracted timeline can…

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

The Perfect TFSA Stocks for Long-Term Growth

Two industry heavyweights are perfect stock holdings in a TFSA for long-term money growth.

Read more »